Mortgages  

Let-to-buy growing in popularity

While the housing market has experienced a revival of sorts in recent months, the recovery has been uneven, with some areas experiencing little or no growth.

However, in a slow market let-to-buy can provide a flexible option, especially as the private rental market is booming. So how does it work?

Provided a homeowner has sufficient equity he can convert the mortgage on his main residence to let-to-buy and rent it out, covering the mortgage payments using the rental income from the property. Meanwhile, equity may also be put towards the purchase of a new main residential property. See Box 1 for an explanation.

While it sounds complicated, it can be useful in many situations. It may be that the borrower needs to move because of a new job or an expanding family, but is struggling to sell the original property. Letting it out can provide some breathing space until the market begins to rise.

Alison Gibson of independent mortgage brokers Ascot Mortgages says that let-to-buy has become increasingly popular in the past couple of years for that reason. She says people who may have bought at “the wrong time” are wanting to hold on to their properties until prices pick up again so that they won’t make a loss.

Mortgage broker John Charcol also charts a rise in sales of the product, reporting that the number of let-to-buy deals it handled rose 45 per cent in 2010, 10 per cent in 2011 and 40 per cent in 2012.

Buy-to-let

Alternatively, let-to-buy could potentially enable a homeowner to set foot on the buy-to-let ladder, with a fledgling property portfolio. It almost sounds like a panacea for the ills of the housing market, but it is not an option open to everyone and there are all the potential downsides of becoming a property landlord.

They take ultimate responsibility for the property and must be prepared to cover void periods and major repairs in the event that something goes wrong, for example. It may be that the property is not suitable for renting out or that there are leasehold conditions that prevent it.

Where it is an option, it will require the homeowner to detach themselves emotionally from the property that was once their home sweet home. They now need to think of it as an investment.

However, things have come a long way since the early days of buy-to-let and the rise of the accidental landlord. Ms Gibson suggests that nowadays borrowers are much more aware of the availability of let-to-buy and/or the need to obtain consent to let, whereby the current mortgage lender gives permission for the property to be rented out.

Many lenders will give consent to let provided the borrower has a valid reason. However, it is usually a short-term arrangement, for a maximum of two or three years. Some lenders give permission in exchange for a small administrative fee, while others insist that the borrower must swap their residential mortgage for a buy-to-let product which is likely to be at a higher rate.